5 Defensive Stocks That Could Pop in 2012 - views

BALTIMORE (Stockpickr) -- Ask any investor, and they’re sure to agree that 2011 has been nothing if not volatile. With the New Year right around the corner, there’s no reason to think that the threats of the European debt crisis, Congressional stalemates, and a double-dip recession are about to abate just because the calendar ticks over to 2012. Instead, it pays to get defensive in this market.

Defensive stocks include companies in recession-resistant industries, firms that have massive cash hoards in their coffers, and companies that pay out income streams directly to shareholders. Not only are defensive stocks a wise core holding for any investor right now, a handful of these protective plays are offering short squeeze potential to investors right now.

In case you’re not familiar with the term, a short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.

Brazilian electric utility CPFL Energia (CPL) is a perfect example of a defensive name worth owning in 2011. Not only does this power stock provide exposure to the growth of Brazil’s economy, CPFL also pays out a hefty 5.17% dividend yield right now, making it one of the highest-yielding utility stocks. For investors looking to simultaneously escape the dollar and diversify their defensive holdings, CPFL makes perfect sense.

CPFL is the largest private power company in Brazil, with more than 6.4 million customers and approximately 13% of the nation’s power market. As Brazil continues to mature its advanced manufacturing economy, the story for growing power demand becomes more compelling -- and CPFL is more than doubling its generation capacity over the next few years to cope with that need for energy.

It’s important to realize that in this case, defensive isn’t the same thing as low-risk. Obviously, CPFL has large exposure to the Brazilian real as well as growth rates in the country’s economy -- any weakness in either would cause this stock to underperform U.S. stocks. Even so, from an uncorrelated diversification standpoint, it makes sense to own names like CPFL right now.

A short interest ratio of 10.7 means that it would take more than two weeks for short sellers to exit their positions in this stock.

Pentair

There’s safety in boring businesses. Take Pentair (PTR), for example: This firm makes water pumps and filters for commercial and home use, as well as enclosures for electrical devices. It doesn’t get much more boring than that -- but that’s why Pentair makes such a good defensive play.

Still, shorts have grabbed ahold of this stock’s story, ratcheting up its short ratio to 9.9; that fact makes Pentair a near-term short squeeze opportunity.

Pentair’s primary business is providing water filtration systems. While that meant that the firm was a major beneficiary of the construction boom of the mid-2000s, its baseline sales numbers are essentially non-discretionary; after all, homeowners and building owners can’t wait to replace their water systems when money flows more freely. Growth in the emerging markets is a big catalyst for Pentair, particularly as demand surges for the infrastructure to produce clean water. Investors should expect that trend to continue as long as affluence continues to increase in emerging economies.

From a financial standpoint, Pentair is in good shape with a manageable debt load and adequate balance sheet liquidity. While the firm’s growth-by-acquisition strategy and positioning as an industrial both tend to tip the deck toward balance sheet leverage, Pentair has historically used its money wisely. The firm’s 2.4% dividend payout should keep investors interested until shorts get shaken out.

Service Corporation International (SCI) is the largest player in the death care industry, a business that’s known for its recession resistance. SCI owns more than 1,400 funeral homes and another 381 cemeteries spread throughout North America, providing everything from pre-need services to burial plots and funerals for clients in the United States, Canada, and Germany.

While death and taxes are certainly inescapable, funerals aren’t. The growing trend of cremation has been threatening SCI’s traditional business in the last few years. That means that the company will need to adapt to new industry trends in order to stay competitive.

As one of the country’s biggest midstream natural gas pipeline owners, Williams Partners (WPZ) gets a lot of attention from income investors looking for an MLP that can generate consistent dividend payouts. And with a yield of 4.98% right now -- it's one of the top-yielding chemicals stocks -- the partnership certainly delivers on that goal.

Williams has been pushing hard to grow its business, acquiring billions of dollars worth of new pipeline assets in the last year and change. That buying spree should leave Williams with substantial earnings growth, an important metric given that scale effectively translates directly into dividend payouts for MLPs. Because these firms don’t pay taxes on earnings, they’re required to push nearly all of their income onto investors.

The vast majority of Williams’ earnings are fee-based. That is, the firm makes most of its money by charging customers to transport their gas. The balance of the firm’s revenues are subject to commodity exposure. That's an attractive balance for investors right now; it means that investors aren’t going to miss out on a commodity rally, and they won’t get shellacked if nat gas prices stay sluggish.

A short ratio of 14.5 suggests that it would take nearly three weeks for short sellers to exit their positions in Williams Partners.

ITC Holdings

Mid-cap energy transmission company ITC Holdings (ITC) is an electricity infrastructure play that serves more than 25,000 megawatts of power to its customers spread throughout the Midwest. Unlike power utilities that serve end-users, ITC’s focus is maintaining the power grid in five states. That business helps to fuel extremely deep net margins, as well as a 1.84% dividend payout.

Shorts in this stock are hurting -- shares have rallied more than 23% so far in 2011. Still, ITC’s short interest ratio currently rings in at 13.9. Investors should watch this name for squeeze potential when it announces fourth-quarter earnings in late January.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.